Carney will regret taking Bank of England reins

Commentary: Even a Canadian banker can’t save U.K.’s economy

By

MatthewLynn

LONDON (MarketWatch) — There are plenty of questions that the English might ask about their new central bank boss. Mark Carney, the governor of the Bank of Canada, who this week agreed to take control of the Bank of England, is not exactly a household name.

A good place to start would be: who is he? Or, why can’t someone British be found to do the job? But the most pertinent one is this: What on earth persuaded him to take the job?

Reuters

Bank of Canada Gov. Mark Carney has been named governor of the Bank of England.

In reality it is easy to understand why British Chancellor George Osborne decided to bring in an outsider. The bank has done a terrible job of steering the British economy. The outgoing governor, Sir Mervyn King, has appeared increasingly clueless about what it needs to do to dig the U.K. out of the permanent recession into which it has slipped. Read about why Carney is one of Osborne’s better choices.

What is hard to understand is why Carney accepted.

The U.K. is in a far more economic trouble than the markets have yet have realized. In the five years that Carney will be in charge, the U.K. will lose its triple-A rating. It will go through another deep recession. The government will change, and there will be a big drop in sterling
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It is hardly an appetizing prospect. Carney is a brave man to take up the challenge, but a foolish one.

There were very few British candidates with the credibility to be offered the job. The bank needs reform, but an insider such as the leading candidate Paul Tucker couldn’t be expected to change it. Adair Turner, the chairman of London’s financial regulator, campaigned for the job, but was discredited by his enthusiastic support for the euro — it is hard to taken seriously when you are closely identified with the most ineptly designed economic experiment of the post-war era. Bank of England governors used to chosen from the City’s finance houses, but they were so discredited by the financial crisis you would be reluctant to put any of them in charge of a Las Vegas casino, never mind a central bank.

That left the government with little choice but to bring in a foreigner.

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Carney has been an excellent governor of the Bank of Canada. He steered the nation’s banks through the credit crunch without any serious damage. Indeed, if there is an economy the U.K. should seek to emulate, it is Canada: small, English-speaking, internationally open, financially responsible, with relatively low debts and stable banks. If Carney could turn the U.K. into a slightly bigger Canada, that would be a fantastic achievement.

The problem for Carney will be his inheritance. King has been a competent governor, but history will not be kind to him. He presided over a huge debt bubble, and while that may have been difficult to control, let alone stop, that doesn’t mean he shouldn’t have tried. He presided over the collapse of massive banks such as Royal Bank of Scotland. He has squandered the bank’s credibility on inflation: its 2% target rate has seldom been met, and is now treated as a joke. He has printed more money than any other major central bank – about a third of the U.K.’s GDP, but to no great effect.

Almost five years after the credit crunch, the U.K. remains stuck with a miserable growth rate — and there are huge problems ahead.

The U.K. has a stubbornly high deficit, and it shows little sign of coming under control.

Last month the government had to borrow £8.6 billion, compared with £5.6 billion in the same month last year. Britain runs a similar deficit as percentage of GDP to Spain — and it is close to a humiliating bailout. It has consistently missed its deficit-reduction targets over the past two years. As the economy stays stuck in recession, that is only going to get worse.

High debts and non-existent growth are a lethal combination even if you are doing your best to bring debt under control — just ask the Italians. It is inconceivable that the U.K. can hang onto its triple-A rating much longer. Its finances are in worse shape than the U.S., and not any better than those of France. Putting it in the same club as countries such as Germany, Singapore, Australia, or indeed Carney’s own Canada, is absurd.

Another recession is certain. Exports to the euro zone account for 13% of GDP, and demand is collapsing. The government will have to make more cuts in spending, and raise taxes again. The Institute for Fiscal Studies forecast this week that VAT, the U.K. sales tax, would have to rise to 25% to keep the deficit targets on track. Rising taxes and spending cuts push weak economies into recession — just ask the Italians or the Spanish.

There will be a change of government. David Cameron’s coalition government is behind in the polls and, with little prospect of an economic recovery before the next election in 2015, faces certain defeat. And yet a high-spending Labour government is unlikely to inspire confidence, any more than Francois Hollande has in France.

So far, the U.K. has managed to maintain the confidence of the markets — just. By printing money, it has kept itself afloat. But stripped of its Triple-A rating, in a deep recession, and with a government facing defeat, it will face a collapse in confidence — either in the bond or currency markets.

No country in the world went on as wild a debt binge as the U.K. According to McKinsey, the U.K.’s debts now total more than 500% of GDP once personal, corporate and government debt are added together. Only Japan owes more, and that is after two decades of recession. The state consumes almost 50% of GDP. The U.K. has lost competitiveness and getting that back is going to be a long hard slog.

Carney negotiated a five-year rather than an eight-year term. That is a clue that he is already well aware the job is impossible. A second term when the first five years are over? Unlikely. The best bet is that Carney will be on the phone to Air Canada booking the first flight home.

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